Budget week is always a battle between the economic head and the political heart. Some difficult decisions make fiscal sense but upset electoral hearts. Take lowering the top rate of income tax whilst reducing tax free personal allowances for pensioners; there are good arguments for both but reducing the tax on high earners whilst charging granny more is not a vote winner. Political bravery is required to suggest that a lower rate of taxation for high income earners will yield a larger tax take for the exchequer because high earning individuals will remain in Britain. Given the high electoral turn out from the over 65s, politicians have to be even braver to bring the personal allowances of pensioners into line with everybody else but in a world where age discrimination is illegal such consistency is logical.
George Osborne may feel he has been brave enough for the time being, and with the next election only three years away he needs to start wooing the electorate. However, given the parlous state of public finances more courage is needed.
Borrowing is being reduced gradually by spending less. There have been deep cuts across the public sector. The easy savings have been made, many quangos have gone, and bureaucracy has been cut. Future savings will require changes in public sector service delivery. In the NHS, for example, there is an emphasis on changing treatment regimes to reduce the length of patient stay in hospitals. The next stage is for bold politicians to reduce the demand for public services. Reducing demand for state schools and hospitals makes economic sense, especially at a time when primary schools are being overwhelmed by a baby boom and hospitals are struggling to meet the clinical needs of an ageing population.
To reduce demand for public services incentives to use private alternatives are required. Progressive tax relief to encourage low and middle income families to use private schools and hospitals would save the state money. These savings could be split; some could be passed back to the exchequer to reduce the national debt, whilst other savings could remain within the health and education budgets. It could even be that with falling demand and usage, per user spending on state schools and hospitals rises.
Using tax relief to encourage families to finance their own healthcare and education is unlikely to win votes. In times of austerity ‘subsidising’ children to attend independent schools is electorally unacceptable. This is regrettable. The costs of any tax relief subsidy would be less than the money saved by the fall in demand for state education. The exchequer and tax payers would gain, as too would education. More choice for parents and students, and more competition between schools, would drive up standards.